What is a Strike Price? Definition, Formula, and Example
A strike price is the fixed price at which an option holder can buy (call) or sell (put) the underlying asset, and it determines whether the option has intrinsic value at expiration.
What a Strike Price Means
The strike price, also called the exercise price, is the price written into an options contract. A call gives the holder the right to buy 100 shares of the underlying at the strike. A put gives the holder the right to sell 100 shares at the strike. The strike stays the same for the life of the contract, except for adjustments after corporate actions such as splits or special dividends. Where the stock trades relative to the strike sets the option's moneyness, its intrinsic value, and most of its price.
How the Strike Price Drives Option Value
Intrinsic value at any moment:
- Call: max(S − K, 0)
- Put: max(K − S, 0)
where S is the underlying price and K is the strike.
Extrinsic (time) value = Option Premium − Intrinsic Value
Moneyness:
| Call | Put | |
|---|---|---|
| In the money (ITM) | S > K | S < K |
| At the money (ATM) | S ≈ K | S ≈ K |
| Out of the money (OTM) | S < K | S > K |
Break-even at expiration for a long position:
- Call: K + premium paid
- Put: K − premium paid
Exchanges list strikes at standard intervals. Common spacing is $1, $2.50, or $5 depending on the share price and the product, and the most heavily traded names and ETFs carry $1 or tighter strikes near the money.
Worked Example: Choosing an AAPL Strike
Suppose AAPL trades at $230 and a trader is bullish over the next 30 days. Three call strikes with illustrative quotes:
| Strike | Premium | Intrinsic | Extrinsic | Break-even | Approx. delta |
|---|---|---|---|---|---|
| $220 (ITM) | $12.40 | $10.00 | $2.40 | $232.40 | 0.75 |
| $230 (ATM) | $5.60 | $0.00 | $5.60 | $235.60 | 0.52 |
| $240 (OTM) | $2.10 | $0.00 | $2.10 | $242.10 | 0.25 |
The $220 call behaves most like stock. It needs only a $2.40 rise to break even, but it costs $1,240 per contract. The $240 call costs $210 per contract and gives the highest percentage return if AAPL rallies hard, but the stock has to gain 5.3% just to break even. The ATM strike carries the most extrinsic value, so it loses the most dollars to theta per day.
When Traders Use Strike Selection
- Directional trades. ITM strikes for stock-replacement exposure. OTM strikes for cheap, convex bets on a large move.
- Income strategies. Covered call and cash-secured put sellers pick strikes by delta. A 0.30 delta strike is a common balance of premium against assignment risk.
- Spreads. Verticals, iron condors, and butterflies are defined by the distance between strikes, which caps max profit and max loss.
- Positioning reads. Heavy open interest at a strike creates call walls and put walls that dealers hedge around near expiration.
Test strike choices against live prices with no capital at risk in the paper trading simulator.
Limitations and Common Misconceptions
- Cheap is not better. A low premium on a far OTM strike reflects a low probability of finishing in the money. Delta is a rough proxy for that probability.
- Strike is not your break-even. A long call is profitable at expiration only above strike plus premium, not just above the strike.
- Early assignment. American-style short ITM options can be assigned before expiration, especially calls just before an ex-dividend date.
- Adjusted contracts. After splits, mergers, or special dividends, strikes and deliverables change. Adjusted contracts trade with non-standard strikes and often thinner liquidity.